The former chief economist at the IMF has a timely warning to offer policymakers about education and the financial crisisby Mark Hannam / October 20, 2010 / Leave a comment
Fault Lines by Raghuram Rajan (Princeton University Press, £18.95)
Since its publication six months ago, Fault Lines has divided opinion amongst economists and policymakers. While it has been shortlisted for the FT Business Book of the Year award (the winner is be announced on 27th October), it has also attracted sharp recent criticism from Nobel prize-winning economist Paul Krugman. The critics are wrong: Raghuram Rajan’s analysis of the global financial crisis remains highly relevant and deserves to be widely read.
Fault Lines borrows a geological term for its title—because, it argues, the crisis was due to a number of economic and political “fault lines” that have been left out of much of the discussion of what went wrong in the global financial system. Rajan, formerly the chief economist at the IMF and now professor of finance at the University of Chicago’s Booth School of Business, is not in the blame game. Rather than point the finger at the usual suspects, he believes that many of those whose actions contributed to the crisis acted lawfully and rationally, given their interests, and he worries that many current policy proposals to stop the same thing happening again are hurried, opportunistic and poorly thought out. He wants us to take a broader view of the origins of what went wrong before we take measured actions to lower future risks.
The first chapters of the book identify seven problems, each of which contributed to the financial crisis and each of which need to be addressed. Of these, two deal with US social policy, two with global financial imbalances, two with the banking system and one with failures of monetary policy. The breadth of Rajan’s explanatory framework—which is presented cogently and concisely within 230 pages of text—marks this book out from many others that tackle the same themes.
He starts by describing the growth of income inequality in America, which he says is directly caused by the growing inequality in educational outcomes. In the US, levels of earnings are largely determined by levels of education. Since the 1980s, improvements in the average years of schooling across the American population have slowed significantly, from around one additional year per decade from 1930 to 1980, to a third of a year per decade since 1980. This is mostly due to stagnant college graduation levels. Despite an increase in enrolment in higher education, graduation rates for men born in…